KEY POINTS:
The Government will force the nation's biggest company, Fonterra, to boost the amount of milk it supplies to rivals this spring.
Fonterra now supplies rival companies with 400 million litres of milk -- about 2.7 per cent of its milk supply -- at cost price each season, but Agriculture Minister Jim Anderton said today announced that for the 2007-2008 season, Fonterra will be required to supply up to 500 million litres of raw milk at the regulated price.
"For the 2008-2009 season, this volume will rise again to 600 million litres," he said.
The Dairy Industry Restructuring Act (DIRA) enables the Government to regulate up to 5 per cent of the milk that Fonterra collects -- equivalent to about 750 million litres this season -- but Mr Anderton has signalled that rival processors with their own suppliers may not be able to count on continuing access to cost-price Fonterra milk .
"There can be no guarantee that those processors with their own milk supply who are competitors of Fonterra will continue to have access to Fonterra's milk supply in the longer-term".
Any regulatory move to cut off the flow of Fonterra milk to processors with their own farmers will hardest hit Open Country Cheese at Waharoa in the Waikato and the tiny Tatua cooperative, near Morrinsville.
In May, Fonterra lost a long-running court case in the highest court of the land, when the Supreme Court ruled it had been overcharging its small rivals for raw milk.
The Commerce Commission -- which has oversight of the DIRA -- said Fonterra was charging those small companies more for their raw milk than it was actually costing Fonterra -- disadvantaging the smaller players.
The Dairy Industry Restructuring (Raw Milk) Regulations 2001 set out a specific way for the "default milk price" -- the basis for price raw milk supplied to rivals -- to be calculated.
The regulations do not say what should happen when demand exceeds the 400 million litre threshold -- but the 400m litres is expected to run out sometime next February.
After losing to the Commerce Commission, Fonterra immediately said it would ask the Government to change the regulations.
The mega-merger which formed Fonterra escaped Commerce Commission scrutiny with the trade-off that the giant company would supply some milk to independent processors at cost price.
A major rival without its own farmers, NZ Dairy Foods gets 250 million litres , and Open Country Cheese and the Tatua cooperative each take 50 million litres, with a further 50 million litres split between many small companies.
But Fonterra has complained that both Open Country Cheese and Tatua have their own milk suppliers and can get as much milk as they need without using the regulations.
"Both take large amounts of milk under the regulations because it is cheap subsidised milk -- they pay less for the milk from Fonterra than they pay their own suppliers," Fonterra said.
"This not a sustainable position and Fonterra will be approaching the Government to review the regulations."
Mr Anderton today said the demand for milk under the regulations had exceeded the maximum volume of 400m litres for the first time, and the Government will review them.
"The Government and the industry are increasingly aware that these regulations are under severe pressure," he said.
The proposed review led by Ministry of Agriculture and Forestry officials will re-assess the current pricing mechanism and will finish by July 31, 2008.
Mr Anderton said he did not know if Fonterra was correct in saying that the regulated price was too cheap: "But the fact that some processors continue to buy milk under the regulations, despite having their own suppliers, indicates that it's worth looking into".
"Dairy processors need some immediate certainty about whether or not they will be able to access raw milk under this mechanism, and at what price," Mr Anderton said.
"Under the raw milk regulations, processors must take milk in October in order to take milk in other months, as October is the peak month for New Zealand's milk production, and notify Fonterra of their requirements the previous summer."
The regulations protect firms which used to have access to Fonterra's milkflows, such as NZ Dairy Foods, which does not have its own farmers.
They are also intended to protect NZ consumers from anti-competitive behaviour from Fonterra and to provide an entrance pathway for new processors.
But Mr Anderton said the 400 million litre block of milk was never intended as "cheap milk" or to attract entry into the industry on the basis of "cheap milk". The intention was always that the milk would be "fairly" priced.
Background information from Mr Anderton's office suggested the milk "shortage" was triggered when Fonterra did not communicate its supply intentions for the 2007/08 season until after the season started.
Fonterra first offered regulated milk on a pro-rata basis to some processors, where part of what they required was supplied at the regulated price and the balance was offered at a substantially higher price.
"Fonterra then switched to a 'first in-first served' allocation system when the legality of their original proposal was challenged," the background paper said.
"A consequence of a first in, first served allocation system is that the quantity of regulated milk is expected to be exhausted by February."
- NZPA
